UPDATE 1-Italy still in talks with Brussels on Monte Paschi's problem loan reduction plan -CEO
(Add source on AMCO's deal, interest from investment funds)
FLORENCE, Italy, Dec 2 (Reuters) - Italy is still in discussions with the European Commission on a plan to further rid Monte dei Paschi of problem loans, the CEO of the state-owned bank said on Monday after a newspaper reported that negotiations had fallen through.
Sources have said the Italian Treasury is seeking to win EU approval for a plan that would allow Monte dei Paschi to cut 10 billion euros ($11 billion) in impaired loans without suffering losses.
The plan would see a chunk of the bank's assets and liabilities transferred to state-owned bad loan manager AMCO.
"The reduction of non-performing loans is something the bank has been working on for years so all possible ways to cut them further are under study," CEO Marco Morelli said on the sidelines of an event in Florence.
"There is an ongoing discussion ... between the Treasury and the European Commission," he added.
Sources have told Reuters that talks are focusing on whether the scheme complies with EU rules on state aid, which would require it to be a market transaction.
Under the deal, the bank is spared from losses while the market value of the loans is factored in when exchanging AMCO shares for a de-merged portion of Monte Paschi's balance sheet.
Italian daily la Repubblica reported on Saturday that Brussels had rejected the plan. It also said two private equity funds had shown interest in some of the lender's assets.
A source familiar with the matter confirmed Monte dei Paschi had received expressions of interest from funds, adding it was now up to the bank's shareholders to assess the best option.
Following a 2017 bailout, Monte dei Paschi is 68% owned by the Treasury, which must find a buyer for the lender in order to re-privatise it by the end of 2021 as agreed with the European Commission.
The latest bad loan clean-up is considered key for Monte dei Paschi to become a merger candidate given the pressure on Italian lenders to further cut loans that turned sour during a recession.
AMCO, which is fully owned by the Treasury, on Friday announced it would raise 1 billion euros in capital by the end of the year as it prepared to take on more soured bank loans.
The capital injection could be instrumental for the Monte dei Paschi deal, a source said then. ($1 = 0.9073 euros) (Reporting by Silvia Ognibene and Stefano Bernabei; Editing by Susan Fenton)
